Option pool (ESOP)

How it works

The option pool gets re-loaded at each round. Investors typically require the company to expand the option pool to cover the next 18–24 months of hiring BEFORE their investment closes — meaning founders bear the dilution, not the new investors. This is called the 'option pool shuffle' and it's a key negotiation point.

Related terms

• Dilution
  Dilution is the reduction in an existing shareholder's ownership percentage that happens when a company issues new shares — typically when raising a new round.
• Term sheet
  A term sheet is a non-binding document outlining the key terms of a proposed investment — valuation, amount, board seats, liquidation preference, anti-dilution, and other rights.
• Vesting (and the cliff)
  Vesting is the schedule on which an employee earns their granted shares — most commonly 4 years with a 1-year cliff, meaning no shares vest until 12 months in, then monthly thereafter.
• 409A valuation
  A 409A valuation is an independent third-party assessment of the fair-market value of a private company's common stock, required by the IRS to set the strike price for stock options.